Analysis of Roll outs for a VEEV Covered CallIntroduction:
VEEV @ $114.65 +1.38 (1.22%) currently has advanced strongly over the last month or two.
In the month of January 2019 VEEV had advanced from about $82 to a recent high of $116. Writing covered calls (CC) has the problem of limiting the up-side gains of a stock. Investor’s compensate for the limited gains by rolling up the strike price to participate in the upward movement of the stock. The CC strike price for VEEV has been raised several times from $95 to $100 to $105 currently. And along the way the $95 protective put has been sold to avoid further time value decay. At the same time a covered call has been written and the stock price allowed to go ITM to provide some downside protection.
We are again considering rolling the $105 strike call as the stock has continued to rise. VEEV is within a point of its high and due for some profit taking. It has advanced 4 days in a row and the last 3 days on high volume. There are several alternative actions to be considered:
1. Do nothing and allow the last written March $105 call to get assigned. Current stats are:
• Current Liquidation Value profit is $451.47 (4.7% return)
• Expiration is in 39 days (3% time value left)
• Expiration profit is $796 (8.2% return)
• Break even @ $96.99
• Cost basis @ $108.66
2. Roll the $105 call to March $110, which keeps the time to expiration constant (39 days) but increased the return with strike price and decreased with time value. Stats are:
• Expiration in 39 days
• Expiration profit at $901 (8.9% return)
• Break even @ $100.99
• Cost basis @ $110.04
3. Roll the $105 call to June $110, which extends the time to expiration out to 137 days and increases the return with both strike price and added time value. Stats are:
• Expiration in 137 days
• Expiration profit at $1,331 (13.8% return)
• Break even $96.69
• Cost basis @ $110.04
Long term we are bullish on VEEV, but short term VEEV is vulnerable to a correction. This poses an additional question: should the roll be done before or wait until after the correction.
VEEV opened the next day strong but hit resistance at the high and began to sell-off. We executed alternative three with VEEV @ $115.60:
Bought back 15-Mar 105 Call @ $12.98
Sold VEEV 21 – Jun 110 Call @ $13.72
The blue line represents the new position and the red line represents the current position as shown by the Simulate Trade Feature from the Position Analysis view in the Portfolio Tools.
This alternative gave up the sure $796 (8.2% return) of the current position for the anticipated continued advance of VEEV and its higher returns. Hopefully this does not turn out to be too greedy!
We liked the idea that the net credit increased but did not like the added time added for the call to expire. Longer term calls do not follow the stock price down as well as shorter term expirations. Therefore, we are also adding a stop loss alert at a $108 stock price. Now only time will tell if this alternative was the best one.
The above analysis was done using the My Portfolio tools on PowerOptions. As you are tracking any position in the Portfolio tools you can link to the Position Analysis view and see potential Roll Out Opportunities, complete with before and after graphs of potential rolls to help with your rolling analysis.
Click HERE to watch a 15-minute video on how the Historical Tools on PowerOptions can solve your back-testing needs!
This discussion came from a Coaching Session with Bob, a PowerOptions Customer.
Bob wanted to see how he could ‘…determine the best historical Delta selection for calls when buying SPY LEAPS.’
Well, the Historical Tools will help us with that.
What Are The Historical Tools?:
There are 3 main Historical Tools on PowerOptions:
Historical Chain. Look up the Option Chain on any stock, on any date back to April 2006. You can then move forward or backwards, to see the price and criteria change day by day. Or, move from one month to the next and beyond to see the change in price.
Historical Search By Symbol: Select a Strategy (in this case, Long Calls). Select a Screen date back in time and then select the Expiration Time Frame. The Historical Search by Symbol will show you the positions that match those filters. You can then Calculate the Group Results to see the gain or loss at expiration, or look at the performance of an individual position over that time period.
SmartHistoryXL: Just like the patented Search tool on PowerOptions, you can input your specific criteria in a strategy to see just those trades that would have matched your trading plan at any date back in time. As with the Historical Search By Symbol, you can then Calculate the Group Results or delve into the performance of an individual position from your screen.
We show these 3 tools in the video, as well as the results based on Bob’s further criteria for his trading plan.
Why Would You Need The Historical Tools?
Have you ever wondered how Out of the Money Bull Puts would have performed on a particular stock, or ETF, over a 1-year, 2-year or 5-year period?
Would Covered Calls on Dividend Paying stocks provide a better yearly return than Covered Calls on stocks with higher Volatility?
Are your Naked Put or Spread Criteria successful over time?
What was the last 5 day price change for all options on NFLX, AMZN, or any other security?
If you have ever asked these questions, or any questions like this that can only be answered with historical options data…the Historical Tools are here for you.
You can upgrade to the Historical Tools at any time from your current Delayed or RealTime subscription. Access to the Historical Options Data (back to April 2006) is only an additional $40 on top of your existing subscription. Simply Click Get History at any time to Upgrade!
Search Strategy Optimization: We can do the same steps above, BUT, Ernie and Mike will add their insight into your criteria, run various tests on adjusted criteria and trigger points, with a Guarantee that we can improve the testing results from your initial search parameters…or your money back.
Oh, those pesky Volatility Indexes, ETFs, ETNs, 2X and 3X and inverses…maybe there are too many now. But, unfortunately, it is time to say ‘VXX – Thanks for the Hedgeories’
It appears Barclay’s is shutting down VXX – iPath S&P 500 VIX Short-Term Futures ETN – on January 29th, 2019.
VXZ – iPath S&P 500 VIX Mid-Term Futures ETN will also terminate.
What is an ETN?
An ETN is an Exchange Traded Note. Unlike an ETF, if you hold shares in an ETN it is more like holding a bond. An ETN is an unsecured debt note underwritten by an institution – in this case Barclay’s.
You can buy shares of an ETN, just like you can with an ETF. But, the ETN is not invested into the asset it tracks.
There are pros and cons to each, but we will save that discussion for another blog.
Why Does the Shut Down of VXX Matter?
We share our approach to using Volatility Indexes, ETFs and ETNs as a portfolio and market hedge. As the unexpected occurs, these volatility securities will swing up (quickly), or down as the market settles.
Using Calls on the VIX (Volatility Index), VXX, UVXY or other securities that monitor volatility can result in high returns to counter losses in your portfolio. At times I found the options on VXX to be less expensive than the VIX, which made them more appealing in choppy markets.
VXX (and VXZ) have been good tools to use for this approach. And since you can buy the underlying, unlike with VIX, you can also trade other strategies such as covered calls, collars, married puts and more.
Also, being able to purchase the underlying can work to help manage a Naked Put, Bull Put spread or other plays on VXX if it moves against you.
But, now we have one less volatility fund to use as a market hedge.
Or, Do We…?
Although VXX and VXZ are reaching termination at the end of this month, Barclay’s is replacing them with other ETNs:
VXXB – iPath Series B S&P 500 VIX Short-Term Futures ETNs
VXZB – iPath Series B S&P 500 VIX Mid-Term Futures ETNs
These two ETNs are already trading and options are available. Right now they are tracking VXX and VXZ respectively, and will continue on when these two are terminated.
How Can ETNs Work as a Hedge?
As we mentioned, shares and options on the volatility ETFs and ETNs can be used to hedge your portfolio for the unexpected. As market ‘bumps’ occur, or during weakness as with the last 3 months of 2018, standard volatility securities will spike up (where the inverses will spike down). If you are positioned to capture the sudden moves in volatile markets, these gains can counter the unrealized losses in other strategies.
Here are links to a few of our resources on trading volatility securities as a portfolio hedge:
Over some years now, we’ve been asking our PowerOptions free trialers and subscribed users what strategies they use most, here are the results…
Long Calls & Puts
Note: This informal survey is a little biased as we are not showing any of the other dozen or so options strategies that the PowerOptions tools support. Those other strategies represent about 1290 votes or 11%. This poll also doesn’t alllow for multiple answers and that introduces some bias as well since I believe many options investors are employing multiple options strategies in their trading.
I thought anyone trading options or researching options would be interested to know how the option strategy interest compares in popularity with those of their fellow investors.
Problem: Your Stocks Aren’t Showing Up On PowerOptions:
A couple of days ago one of our subscriber-investors called me with a problem. He complained that the stocks shown in the PowerOptions search results were companies he didn’t recognize and he had never traded before and wasn’t trading now. This happens often and for a whole list of reasons… We don’t know the list of stocks YOU like unless you enter them in a list… and the search tools find any stock, Index or ETF that meet the search parameters for that strategy.
If your favorite stocks aren’t showing up, it’s because they:
Don’t meet one of the Fundamental or Technical Criteria.
May match those criteria, but the options don’t match the Options Criteria.
Are further down the list… maybe pages down in the results.
You can ‘force’ the search tools to look only for option results that are on your lists! Just use the Watch LISTS tool to focus searches on stocks you’d like to see.
If you are not interested in new alternative investments, you can focus on present holdings by using a list of those holdings for search. On the Home page an investor can use the PowerWatch List create up to 5 lists of stocks to watch or search against in any strategy to find option opportunities.
Once setup you can:
Monitor your stocks for price changes during the day.
Use the blue ‘More Info’ button to view the chart, news, earnings and more!
Quickly toggle between Watchlists of:
Stocks You’re Watching for Opportunities
Once you create a Watch List you can select it from the Lists tab in any strategy. This will allow you to screen against only your preferred stocks. Note: If the 5 Watchlists aren’t enough for you… there’s an unlimited number of lists you can setup expressly for your searches, they just won’t be shown in the Watchlist area.
The Watch Lists can be used for a variety of purposes. This sample PowerWatch List 4 is a list of optionable marijuana stocks and focuses on a specific market sector. If you have an advisory service that has a preferred stock list of opportunities, you can paste them into the Watch Lists and screen against those stocks in any strategy as well.
At the beginning of the year I wrote a Blog article about “A 2018 Market Forecast“. The basic forecast I setup was a rotation of sectors based on the economic and political environment of the time. About a dozen stocks were recommended in 5 sectors. Using those recommendations, I formed a model portfolio and have been tracking the results over the last 6 months. This article will review how that model stock portfolio has performed and offer some portfolio re-allocation ideas. The initial portfolio in January was:
There are 10 positions in the portfolio. $100,000 total was invested with about $10,000 in each position. During the last 6 months there have been some wild swings in the prices, but no changes were made to the portfolio. As an example, SLB was up as high as $79 and as low as $63. It is currently at $67 with little change from January. The concept of the portfolio was long-term and not to trade daily. Most of the positions in my actual account were done as married puts to insure the positions against some unforeseen event.
Four of the ten positions are profitable at the end of June and two of them very profitable. The 2 weakest position FCX and GLOG were purchased near their peaks, but I believe still have good prospects. Overall the portfolio is positive by about 9% and at one time was up about 12% in the last 6 months. The market sell-off over the last week in June took the edge off some of the best performers.
One of the reasons for doing a 6-month review is to evaluate the need for re-allocation of some positions. The original concept of portfolio re-allocation was originally applied to a portfolio that consisted of cash, bonds, and stocks. Since bonds and stocks are generally counter cyclical i.e. when bonds out perform stocks do not and visa versa, therefore there is an opportunity to sell the out performer and invest in the other for a cycle reversal. This same concept can be applied to sectors or a portfolio in general.
Since this is a “stock only” portfolio there are 2 streams of thought where portfolio re-allocation is concerned:
1. Sell the poorest performer and invest the proceeds in the best performer. For cyclical stocks this approach runs the risk of selling the poor performer just as they have bottomed and buying into an overpriced stock ready for a correction.
2. Sell the best performer believed to be over bought or extended and invest in the issue believed to be presently undervalued and about to move higher. This approach risks poor timing. The good performer may continue to advance, and the poor performer may start hitting new lows again.
Without a crystal ball, it’s a matter of judgement on the timing. In this case I’m siding with approach #2. The 2 stocks that advanced the most now represent a disproportionate amount of the portfolio. They have a value 50% more than the original $10,000 allocated. Therefore, perhaps the portfolio should be re-balanced by taking some profits in HQY, which also happens to look over extended and perhaps ready for some profit taking. And the proceeds from the HQY sale would be invested in the 3 stocks that have the most promise to advance FCX, KMI and GLOG, all three of which happen to be the poorest performers at this time.
Note, seven out of the ten stocks in the portfolio have dividends. The effective cost per share of those stocks is lowered by the dividend. Dividends increased the total unrealized portfolio return about 1% in the first six months. Also note that the top 3 highest performing stocks had high growth rates but no dividend.
The sale of HQY and allocation of the sale proceeds left $1,694 in cash in the account. Adjustments were made to the original portfolio for the sale of 100 shares of HQY, dividends on 7 of the stocks, and the purchase of addition shares for FCX, KMI and GLOG. The resultant portfolio now is shown below:
With the changes suggested the new allocation by sector and industry will look like at the end of June:
I have been trading stocks for over 40 years. And yet mistakes are often made despite the years of experience. Just when one thinks things are going fine, something happens that humbles the trader. It is with this background that I relate a recent trading experience as a lesson we can all learn from.
Background of the trade:
Earlier in the year the stock Red Hat, Inc. (RHT) was traded for a 28% profit (as shown on the Fusion Track record at RadioActiveTrading.com). But after a market sell off it looked like a market opportunity to re-enter the position. RHT was purchased on 3/28/2018 for $145. A put option was also purchased following the rules in The Blueprint to create a Married Put for safety.
RHT rose soon after the purchase into the 150’s and then shot up to the 160’s. The put was sold as it still had some time value, and my thinking at the time was that RHT would continue to rise. To provide an additional ‘hedge’, I sold an OTM call to generate income and lower the cost basis. But the stock continued to rise and soon was in the $170’s. The sold call had to be rolled up several times. The call was rolled up and out in time for a small credit or small debit, so the overall profit was not impacted too much. So, although the call was rolled, it seems this was a brilliant investment at the time.
Earnings were to be announced on 6/21 after the close. Earnings were growing at the 20%+ rate and were expected to continue at this pace. One of the talking heads on Mad Money lauded the growth rate and recommended the stock. When RHT went into the mid 170’s, it looked like the covered call insurance was just limiting the upside gains. And with earnings coming out shortly buying back the call looked attractive to leave the upside open for the next great earnings announcement. The downside would be protected with a mental stop. After all there was almost a 30-point gain already and plenty of room to sell if earnings were not as anticipated.
Earnings were announced on 6/21 after the close:
RHT @ $165.73 -3.49: Thursday, after the close, reported fiscal Q1 net income of $113.2M. On a per-share basis, RHT said it had net income of 59 cents. Earnings, adjusted for one-time gains and costs, came to 72 cents per share.
The results exceeded Wall Street expectations. The average estimate of 15 analysts surveyed by Zacks Investment Research was for earnings of 68 cents per share. The open-source software company posted revenue of $813.5M in the period, also beating Street forecasts. Twelve analysts surveyed by Zacks expected $807.3M.
For the Q2 ending in September, Red Hat expects its per-share earnings to be 81 cents and revenue in the range of $822 million to $830 million for Q2. Analysts surveyed by Zacks had expected revenue of $856.2M. After hours the shares are down 20 points or 12%.
As indicated in the announcement, the results for Q1 were better than expected. But in the 3rd paragraph of the announcement there was a forecast a weaker Q2. On Friday, RHT sold off to $142.14, down -$23.59 or -14.2%. The gains of the last 3 months were completely wiped out. That mental stop was useless since RHT opened at $143 with little chance to exit. Had I had a true stop order at $145, or even $150 or $160 – all would have been violated and I would have been closed out at the open price below $145. Hard stop orders and mental stops are ‘assumed insurance’ around a major event.
In one day, the position went from a brilliant trade to a stupid move. The once 30-point gain went to a 4-point loss. What went wrong? Over confidence and arrogance was the source of failure. Each time a large decline like this is experienced it is generally due to over confidence. In fact, when one feels that rush of excitement of a great trade and brilliant move – LOOK OUT! This might be an early warning sign of danger ahead.
It is important to have the discipline to think safety first, beyond a mental or even a hard stop order. Not necessarily from a stand point of fear, but caution that the market can be cruel and punishing in the event of a surprise.
Enter hard fast protection in anticipation of some unknown event, especially when earnings are due. Not just some soft silly mental stop. A low cost, short term Put would have won the day in this case instead of trading on overly optimistic greed. Learn from your mistakes and become a better trader. Experience may be necessary, but not sufficient. Discipline is needed to protect positions from unforeseen events.
How can you properly insure trades and not get hurt using a mental stop or stop order?
Click HERE to Get The Sketch – a 9 page white paper that introduces the proper way to limit risk on your stock positions. Just enter you name and email and click Get the Sketch!
Do you have an unrealized gain in a stock with Earnings coming up?
Check out the Insurance tool on PowerOptions (you can register for a 14 day free trial HERE – no credit card or billing info required!). The Insurance tool will show you which put strike will give you the best protection based on your cost basis – and show you how to lock in most of those gains ahead of earnings…AND…leave the upside open!
Looking for another way to play Earnings?
Options give us…Options! I could have taken the profit on RHT off the table, and used the proceeds to enter a near term straddle prior to the earnings that would have added more profit…even with the -14.2% decline!